The UPA shifts into poll gear

The rather unexpected decision to set up a pay commission for central government employees shows that the UPA is in election mode. Such handouts are usually spread out over at least two years with implications on the fiscal math.

The last salary revision, which took effect from January 1, 2006, saw pay cheques rise by an average 21%, costing the State an extra Rs.17,000 crore annually. The employees also got one-off arrear payments of about Rs.29,000 crore, driving up spending on assets.

The new wages are still more than two years away but their import needs to be scrutinised in the larger economic calculus, not just for the Centre, but for the states as well.

In macro-economics, the twin gaps — current account and fiscal deficits — are of paramount importance. The former gives a measure of the difference of values between what India sells to and buys from the world. If no action is taken, we have to either earn about $80-$100 billion every year through stronger dollar inflows such as FDI or meet the deficit by depleting our foreign exchange reserves.

Clearly, both the options are not realistic and it is indeed a worrying sign for a slowing economy where fulfilling immediate dollar payment obligations may necessitate dipping into the pool of foreign exchange reserves. Fiscal deficit, on the other hand, gives an idea about the amount of money the government needs to borrow to fund its current expenses.

Salaries and allowances form a significant component of a government’s current spend. Fiscal deficit, like the current account deficit, is a ‘red line’ that the government would not want to cross, for one just cannot keep on borrowing without limits.

The government would be well aware of the need for a firm hand on the fiscal situation in the context of employee pay hikes. The fifth pay commission’s recommendations, effective from 1996, hold out important lessons. The Centre had declared salary hikes and also favoured the revision of state government employees’ wages.

While the Centre’s wage bill nearly doubled, it was the states, with lesser revenue earning potential, which had to bear the fiscal tremors for many years. It may be just the right time to give a serious thought to the fifth pay commission’s suggestion that wage revisions should be entrusted to a permanent pay commission drawing its authority from a constitutional provision and whose recommendations, made annually, should have a binding character. This will adjust wages for inflation, and make the process budget neutral.